D. Delli Gatti
- Asset prices and monetary policy: a new view of the cost channel
- Number of pages
- Amsterdam: Faculteit Economie en Bedrijfskunde
- CeNDEF Working Paper University of Amsterdam
- Volume | Edition (Serie)
- Document type
- Faculty of Economics and Business (FEB)
- Amsterdam School of Economics Research Institute (ASE-RI)
Should the central bank act to prevent "excessive" asset price dynamics or should it wait until the boom spontaneously turns into a crash and intervene afterwards to attenuate the fallout on the real economy? The standard "three equation" New Keynesian framework is inadequate to analyse this issue for the very simple reason that asset prices are not explicitly included in the model. There are two straightforward ways to take into account asset price dynamics in this framework. First of all, the objective function of the central bank - usually defined in terms of inflation and the output gap - could be "augmented" to take into account asset price inflation. Second, expected asset price inflation can affect the IS curve through a wealth effect. In this paper we follow a different route. In our model in fact, the expected asset price dynamics will be eventually incorporated into the NK Phillips curve. This is due to the assumption of a cost channel for monetary policy which is activated whenever monetary policy affects asset prices and dividends. In fact they determine the cost of external finance in the simple "equity only" financing model we consider, abstracting for simplicity from internal funds and the credit market.
If you believe that digital publication of certain material infringes any of your rights or (privacy) interests, please let the Library know, stating your reasons. In case of a legitimate complaint, the Library will make the material inaccessible and/or remove it from the website. Please Ask the Library, or send a letter to: Library of the University of Amsterdam, Secretariat, Singel 425, 1012 WP Amsterdam, The Netherlands. You will be contacted as soon as possible.